taking loan from 401k to pay off credit card debt

[JoeBJay20]

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@Anonymous wrote:

hi marine..

chase credit limit is 13,500 with balance of 5900

other cc:

discover: 12,700, with balance of 0

capital one: 11900 with balance of 0

other chase: 5000 with balance of 0

citi: 12000 with balance of 0 

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That puts your total utilization at 11%, which is pretty good.  As a general rule, I always advise people to never make financial decisions based on credit scores.  As AndySoCal explained, you would be losing at least 20% (realistically over 30%) of your investment for withdrawing from it before the age of 59.5.  Withdrawing early from retirement accounts is a financial decision of last resort.

[Jazzzy]

Do any of the other credit cards have balance transfer offers that would allow you to transfer the debt and lower the interest rate? From the information you've given, it's not a good idea to pull the money out of retirement. That becomes awfully easy to do, and it's a habit you don't want to develop.

[Anonymous]

I just did this very thing, so I suppose you can learn from my experience/mistakes.

Credit Card debt before loan (numbers rounded off for simplicity):

Card1  $2200  APR 29.99%

Card2  $6000  APR 22.24%

Card3  $5500  APR 20.24%

Card4   $650   APR 20.24%

Card5  $3600  APR 28.99%

Card6  $7050  APR 17.99%

Yes, I was aware that the money I took out of my 401k to pay off these cards would not be available to generate returns on investment.  Yes, I realize this year to date has been a good year for any 401k owner who was contributing to their 401ks on or before January 2009 - my own 401k return is pushing 25%, despite the presence of bond funds and money market funds within my 401k portfolio.  On the other hand, stocks have historically averaged 11% a year in annual return, including the years of the Great Depression and the bubble years of the dot.com era, and there is no guarantee 2010 will deliver a return for 401k owners even close to 2009's return.  For me, iit came down to a choice between a potential gain of 11% for 2010 vs. another year of paying off credit card debt at a rate of 17.99% or higher.  

In my state, I do not pay taxes on my 401k loan unless I default on it.  

As for the OP, I would say this:  Don't take that 401k loan.  You didn't make the kind of mistakes I've already made, running up the balances I had at those APRs.   I plan to pay off my 401k loan as quickly as possible.  I used a spreadsheet to figure how how much I can afford to apply towards loan payoff and I will be paying that maximum amount every month.

[Anonymous]

lynette,

I called discover and they have a  0% interest balance transfer until march 2010 but the fee is 5% of the transfer. I dont think this will work for me because I can't pay off the 5900 by then. your thoughts?

thanks,

Jason 

[haulingthescoreup]

I'm not Lynette, lol, but just to point out for everyone looking at BT's, when the term is for less than a year, the real interest rate is higher. Sounds like the Discover offer is for 6 months, yes? Actually less, since it's almost November. A 5% BT fee works out to the equivalent of 10% APR when you only have a half year to pay it off.

Maybe this would make sense for moving part of your CC debt, if you can figure out how much you could afford to pay off in 6 months, or 5 months real life. Just realize that when you're comparing APR's, you have to regard this one as 10%+.

[Jazzzy]

I agree with hauling's calculations. The transfer doesn't help much if it's not for a long enough time.

If it was me, I would try to pay this out of current income by living as bare bones as possible. I know it may not be fun, but, as I said before, taking loans from 401ks becomes very easy and eats into your future retirement. If this was a case of saving your financial life, I would think differently, but it's not. I'm in a 401k environment where I can't borrow from it...and I'm glad.

This is not going to make or break your future, and you need to do what makes you comfortable. Taking a small ding for the future may be worth getting rid of the stress for you.